By now, you may have heard that Silicon Valley Bank (SVB) is no more. This is the second largest bank failure in the history of the United States (falling only behind Washington Mutual). Admittedly I had never heard of SVB until a few weeks ago.

The FDIC closed SVB’s doors on Friday.

What Happened?

It does not appear this was a case of reckless lending by a financial institution. Yet, it was a liability mismatch problem due to large unrealized losses in the bank’s underlying bond portfolio. This was largely caused by soaring interest rates and apparently some bad risk management.

When a run on the bank ensued last week, SVB didn’t have the money to meet their customers withdrawal requests.

While I could go into great depth and share many granular details, I don’t suspect everyone has an interest in that. If you do want to get deeper into the weeds, many others have already written better pieces on this subject than I could. I would recommend checking out hedge fund manager, Marc Rubinstein’s, blog post here: The Demise of Silicon Valley Bank - by Marc Rubinstein (netinterest.co)

Mr. Rubinstein does an excellent job of describing the situation.

As it turns out, a very large percentage of SVB’s deposits were uninsured as depositors supposedly ignored the FDIC limits or chose not to protect their money via other means.

On Sunday evening, US regulators stated that all insured and uninsured depositors would be able to withdrawal their full balances on Monday, if they’d like. This does beg asking the question if FDIC insurance limits actually mean anything.

To prevent further panic in the financial system, last night the Federal Reserve Bank announced the launching of a new program called the Bank Term Funding Program (BTFP) which will offer loans up to one year to eligible financial institutions in order to meet their customer’s needs.

What’s Next?

It is likely we will see more bank failures in the coming days or weeks. Signature Bank out of New York failed overnight. They ended 2022 with $110 billion in assets on the balance sheet, so once again this is not small potatoes.

There are rumors of several other large banks being on the brink of collapse.

How Does This Affect You and What Should You Do?

US Treasury yields have been cratering, which means investors will see a nice boost to their fixed income portfolio values in the short run. In the long run, if inflation remains stable you are now likely to see a lower real return on your money from fixed income.

I don’t get too caught up in the crisis du jour that financial markets bring us, but this is an event that brings an unsettling feeling for many investors.

My guess would be that we will see very large daily moves (if you’re watching daily) in markets over the coming days or weeks. These are the types of days where the afternoon could look very different than the morning. It’s all noise. In the long run the patient, diversified investor is rewarded.

We are never going to recommend timing the entry or exit points to markets for two core reasons:

1. No one can do that in a consistent accurate manner, and it will likely cause you more harm than good to engage in such an activity.

2. The best days in markets and the worst days in the market are very close together, and if you miss the best days then you are likely to experience subpar lifetime investment returns.

Take for example the below data from Dimensional Fund Advisors, showing how missing a short great period of returns can mess up your long-term results:

Notice the dates listed at the bottom. Best week? 11/28/2008. Best month? 04/22/2020. What preceded the great spurts of returns? Very chaotic market events.

Dwight Eisenhower liked to say that Napoleon’s definition of a military genius was “the man who can do the average thing when all of those around him are going crazy”. The average thing an investor can do at a time like this is remain calm, remain patient, and stay the course.